Federal Reserve Chairman Ben Bernanke said today that the central bank is prepared to take additional steps to boost U.S. economic growth, while he cautioned lawmakers against making moves to balance the budget that would harm recovery efforts.
The Fed “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” said Bernanke when giving testimony before Congress’s Joint Economic Committee in Washington this morning.
Lawmakers on a separate bipartisan congressional supercommittee have been charged with finding $1.5 trillion to cut from the deficit by November 23. While Bernanke acknowledged that doing so would be taking a “substantial step” to attaining fiscal sustainability, he also said, “A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery.” Bernanke added, “Putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term,” he said, without being more specific.
On September 21, Bernanke announced “Operation Twist”, in which the Fed would replace $400 billion of Treasuries with longer-term securities in a move intended to reduce borrowing costs and help lower unemployment. The program was supposed to “put downward pressure on longer-term interest rates and help make broader financial conditions more supportive of economic growth than they would otherwise have been,” said Bernanke.
In his speech this morning, Bernanke noted economic indicators, such as initial unemployment benefits applications and surveys of hiring plans, that he said “point to the likelihood of more sluggish job growth in the period ahead.” The economy expanded at a 1.3% annual pace during the second quarter, after expanding at a 0.4% rate during the first. “The recovery from the crisis has been much less robust than we had hoped,” said Bernanke, and Fed officials expect a “somewhat slower pace of economic growth over coming quarters” than they did in June. Today’s comments were Bernanke’s first on the economy since he announced Operation Twist last month.
While Bernanke did not detail any specific plans to combat the economic slowdown, Fed Governor Sarah Bloom Raskin said last week that while the Fed’s actions have been “somewhat more muted than I might have expected,” that shouldn’t imply that additional easing “would be unhelpful.” However, today Bernanke said that “monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy.”
“Fiscal policy is of critical importance,” said Bernanke. “But a wide range of other policies — pertaining to labor markets, housing, trade, taxation, and regulation, for example — also have important roles to play.”